#### Question

Financial information for Forever 18 includes the following selected data:

$\begin{matrix} \text{(\$ in millions)} & \text{2018} & \text{2017}\\ \hline \text{Net income} & \text{$\$ 129$} & \text{$\$ 308$}\\ \text{Dividends on preferred stock} & \text{$\$ 20$} & \text{$\$ 15$}\\ \text{Average shares outstanding (in millions)} & \text{150} & \text{400}\\ \text{Stock price} & \text{$\$ 12.02$} & \text{$\$ 10.97$}\\ \end{matrix}$

- Calculate earnings per share in 2017 and 2018. Did earnings per share increase in 2018? 2. Calculate the price-earnings ratio in 2017 and 2018. In which year is the stock priced lower in relation to reported earnings?

#### Solution

Verified#### Step 1

1 of 4We are going to use following claims:

$\begin{align*} &\boxed{\text{EPS} = \dfrac{\text{Net income- Preference dividend}}{\text{Average outstanding shares}}} \\\\ &\boxed{\text{Price earnign ratio}=\dfrac{\text{Stock Price }}{EPS}.} \end{align*}$

Let's work out our problem: In our case, in 2017., net income of company is $\$ 308$ million.

The company paid dividend of $\$15$ milion on preferred stocks. Outstanding shares of the company is $400$ milion and stock price is $\$10.97$.

Then, in 2018. , net income of company is $\$ 129$ milion. The company paid divident of $\$ 20$ milion on preferred stocks. Outstanding shares of the company is $150$ milion and stock price is $\$ 12.02.$.